Consider two firms competing à la Bertrand with homogeneous product. Suppose a third firm enters the market. Market power, measured by the Lerner Index, of the two firms already in the market: O (a) Always decreases for both firms O (b) Always decreases for the firm with higher marginal cost O (c) Decreases for both firms only if the new entrant has a lower marginal cost than the two firms already in the market O (d) None of the above
Consider two firms competing à la Bertrand with homogeneous product. Suppose a third firm enters the market. Market power, measured by the Lerner Index, of the two firms already in the market: O (a) Always decreases for both firms O (b) Always decreases for the firm with higher marginal cost O (c) Decreases for both firms only if the new entrant has a lower marginal cost than the two firms already in the market O (d) None of the above
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Consider two firms competing à la Bertrand with homogeneous product. Suppose a third firm enters the market. Market power, measured by the Lerner Index, of the two
firms already in the market:
O (a) Always decreases for both firms
O (b) Always decreases for the firm with higher marginal cost
O (c) Decreases for both firms only if the new entrant has a lower marginal cost than the two firms already in the market
O (d) None of the above
Expert Solution
Step 1
The model lays on quite certain suppositions. There are no less than two firms creating a homogeneous (undifferentiated) item and can't collaborate in any capacity. Firms contend by setting prices at the same time and purchasers need to purchase everything from a firm with a lower price (since the item is homogeneous and there are no buyer search costs).
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